Banc of California, Inc.

Hello and welcome to Bank of California's third quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. This call is being recorded and a copy of the recording will be available later today on the company's investor relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release, which is available on the company's investor relations website. The reference presentation is also available on the company's investor relations website. Before we begin, we would like to direct everyone to the company's safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would like now to turn the conference call over to Mr. Jared Wolf, Bank of California's chairman, president, and chief executive officer. Please go ahead.

Good morning, and welcome to Bank of California's third quarter earnings call. Joining me on today's call is Joe Cowder, our chief financial officer, who will talk in more detail about our quarterly results, as well as Bill Black, head of strategy for PacWest, who will be joining Bank of California in a similar capacity upon the closing of our merger with PacWest. I'd like to start off by congratulating the teams at Bank of California and PacWest on a terrific job obtaining regulatory approval. It is worth noting that we obtained regulatory approval for the merger and also obtained approval for the combined bank to become a member of the Federal Reserve, which really is its own process altogether. These approvals didn't just happen, and they required significant coordination. The results reflect the dedication and hard work of our colleagues and advisors. We also appreciate the dedication and equally hard work of our federal and state regulators who had an important job to do. With regulatory approvals in hand and our shareholder meeting set for late November, we anticipate closing on or around November 30th. We look forward to delivering a franchise poised to provide significant benefits to our shareholders, clients, communities, and colleagues. Our two companies have made significant progress on integration planning, which is proceeding smoothly, along with the preparation for the balance sheet repositioning actions that will occur in connection with the closing of the merger. I want to thank the Bank of California and PacWest team members for their tremendous efforts, planning, and dedication towards a successful close. Turning to our third quarter performance, our results reflect many of our strategic decisions to position our balance sheet ahead of our merger with PacWest, which include limiting certain long-term fixed rate deposits, resolving certain acquired credits, and hedging the interest rate risk associated with the various assets we anticipate selling in connection with the closing of the merger. As a result of these initiatives, we generated net income of $42.6 million during the quarter, had increases in all of our capital ratios, and grew tangible book value per share by 5%. Joe is going to provide some details, but our trends were positive and set us up well ahead of closing. expansion of our net interest margin, disciplined expense control, and continued growth in new commercial relationships. As I've discussed in the past, against a backdrop of economic contraction and overall decline in deposit levels across the banking industry, we are focused on bringing new core deposit relationships to the bank. Through the first nine months of the year, we have generated over $200 million in in new non-expiry deposits from new commercial relationships. These new relationships offset deposit outflows today and will continue to benefit our company in the future. Given the highly liquid balance sheet we expect to have following the merger, including a loan to deposit ratio at closing that is expected to be in the low 80s, we intentionally refrained from adding higher cost deposits to offset any deposit outflows. We continue to see healthy loan yields and have note in this quarter An increase in loan yields outpaced the increase in cost of funds. Key asset quality ratios improved quarter over quarter, and asset quality remained strong. We recorded a $5 million provision for credit losses, which was primarily related to loans from the PMB acquisition, that we felt it was prudent to resolve ahead of the merger closing. At the beginning of the year, we indicated that one of our priorities was ramping up our new payments processing business, which we launched during the third quarter, on track with our projected timeline. As we have said all along, we are being very prudent in the development of this business, and we have steadily built our process and risk management systems as we have added clients. We continue to expect this business to begin making meaningful contributions during 2024, which will be accelerated with the PacWest merger and the larger client base to whom we can offer this highly differentiated payment solution. In particular, we believe that there will be a high usage rate among clients in PacWest Venture and HOA businesses. Now let me hand it over to Joe, who will provide some more color on the performance, and then I'll have some closing remarks before opening up the line for questions.

Thank you, Jared. Please feel free to refer to our investor deck, which can be found on our investor relations website as I review our third quarter performance. I will start with some of the highlights of our income statement, and then we'll move on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the second quarter of 2023. Our earnings release and investor presentation provide a great deal of information, so I will limit my comments to some areas where additional discussion is warranted. Net income for the third quarter was $42.6 million or $0.74 per diluted share. On an adjusted basis, net income totaled $17.1 million for the third quarter or $0.30 per diluted common share when we exclude impacts from certain credit certain merger-related items, including a pre-tax gain of $46.2 million on derivative instruments and $9.3 million of transaction costs related to the proposed merger with PacWest Bank Corp., which we will discuss later. This compared to adjusted net income of $18.4 million, or $0.32 per diluted common share, for the prior quarter. Our interest income was almost flat, with a $0.4 million decrease from the prior quarter primarily due to a 360.4 million decrease in average earning assets, partially offset by an eight basis point expansion of our net interest margin to 3.19%. The decline in average earning assets was driven primarily by the reduction in excess liquidity that the company carried through the first half of the year. The improvement in our net interest margin to 3.19% was a result of the impact of a 16 basis point increase in the overall earning asset yield to 5.36%, while our total cost of funds increased by only nine basis points to 2.29%. Our average loan yield increased 10 basis points to 5.38%, which was largely attributable to variable rate loans in the portfolio continuing to reprice and higher rates on new loan production. Rates on new loan production increased 19 basis points to 8.36%. Also, the average yield on securities increased 34 basis points to 5.17%, mainly due to CLO portfolio resets. Our average cost of deposits was 1.86% for the third quarter, up 19 basis points compared to the second quarter. And since the fourth quarter of 2021, our average deposit beta is 34%. The average cost of interest-bearing deposits increased 27 basis points compared to the prior quarter, largely a result of overall higher rates. Our non-interest income increased 44.8 million from the prior quarter, primarily due to a 46.2 million mark-to-market gain on the derivative instruments we entered into in connection with the announcement of the proposed merger with PacWest. Excluding this mark-to-market gain, the other areas of non-interest income were relatively consistent with the prior quarter. Our non-interest expense increased $7 million from the prior quarter, primarily due to transaction cost of $9.3 million related to our proposed merger with PacWest. Our adjusted non-interest expense decreased $2.2 million from the prior quarter due to lower salaries and benefit cost. Turning to the balance sheet, our total assets were $9.2 billion at September 30, a decrease of approximately 1% from the end of the prior quarter. which reflects the impact of the strategies we are employing to position our balance sheet prior to the closing of the merger. Our total equity increased by $44.7 million during the quarter, as $42.6 million in net earnings and $6.3 million in lower unrealized losses on AOCI were partly offset by common stock dividends. Our total loans decreased approximately $195 million from the end of the prior quarter as our outlook for loan originations remain cautious in the current economic outlook environment. Our total deposits also decreased 230 million from the end of the prior quarter. As noted, we've refrained from adding higher cost deposits to offset outflows given the highly liquid balance sheet that we expect to have following the closing of the merger. Our credit quality remained solid in the third quarter, and excluding our SFR portfolio, which is anticipated to be sold in connection with the closing of the merger, we had declines in all of our problem loan categories. A large percentage of our delinquent and nonperforming loans continue to be SFR loans that are well-reserved for and have low loan-to-values, so we view the loss potential as low. We recorded a provision for credit losses of $5 million related to loans. As Jared indicated, The provision was mainly related to loans added in the Pacific Mercantile Acquisition, as were the related charge-offs that we had in the quarter. In anticipation of closing the merger with PacWest, we took the opportunity to accelerate resolution of these credits. Our allowance for credit losses at the end of the third quarter totaled $78.4 million compared to $84.9 million at the end of the second quarter, and our allowance to total loan coverage ratio stood at 1.13% compared to 1.19% at the end of the prior quarter. Although the total loan coverage ratio declined, the non-performing loan and non-performing asset coverage ratios each improved by three basis points in the quarter. At this time, I will turn the presentation back over to Jared.